Bank interest rates set to come down

Bank interest rates set to come down
Times of India, June 11, 2009, Page 19

NEW DELHI: Interest rates on home, other retail loans and corporate loans offered by PSU banks are likely to come down by 50 basis points in the near future. Chiefs of PSU banks on Wednesday have promised to ‘‘explore the possibility'' to cut interest rates in a meeting with FM Pranab Mukherjee.

In the meeting, Mukherjee expressed his concern over the fact that banks have not passed on the benefits of reduction in key rates by RBI in recent past by cutting benchmark prime lending rates (BPLR). ‘‘I would urge banks to address these concerns expeditiously and in adequate measure,'' Mukherjee said, adding, rate cuts would help restore the environment for rapid growth.

Mukherjee said: ‘‘As a financial intermediary, the banks have to stand-by to provide credit at reasonable rates. This is an area of concern in many quarters both within the government and outside.''

‘‘SBI will decide on lowering interest rates by month-end,'' said its chairman O P Bhatt. He said that interest rates could come down, as the cost of incremental deposits has gone down. Taking a similar view, Canara Bank, IDBI Bank and Corporation Bank said their committees would also meet by month-end to take a final view on the rate cut.

A reduction in BPLR will benefit the existing home loan and car loan borrowers at floating rates. If the BPLR is cut by 50 basis points, their interest burdens will go down by the same amount.

However, this will not benefit new borrowers as banks are already lending at below BPLR-linked rates to them. Take for example SBI's home loan rate. According to the BPLR-linked rate, it is in the range of 9.75% and 11%. But, it gives home loan to new customers at 8%. Similarly, banks are giving loans to good companies at below BPLR. Therefore, any cut in BPLR will not benefit the new customers.

However, PNB CMD KC Chakravarty said that it was not in the position to revise the rates downwards as its BPLR is ruling at 11%, the lowest level of the industry. CMD of another large public sector bank said it would also not be able to cut rates immediately as cost of funds has not gone down substantially.

In the meeting, bankers suggested that government should cut rates on small savings like PPF and post office deposits to discourage movement of funds from bank deposits to other small savings schemes, after banks cut deposit rates. However, it is learnt that FM rejected the idea, saying that this would affect the overall savings rates in the country, which, in turn, would affect the growth rate.

Mukherjee also urged banks to provide cheap loans to agriculture and other labour intensive sectors to ensure inclusive growth. He said PSU banks should look at consolidation through M&As to emerge stronger financially.